Posts tagged 'Basel'

People don’t like it when banks default on their obligations, because lots of people use those obligations as money. Think of deposits, or commercial paper sold to money-market mutual funds. The problem is that, absent offsetting regulations, government guarantees preserve the value of these forms of money at the cost of transferring wealth to bankers and — to a much lesser extent — bank shareholders, while also encouraging excessive lending.

The $50 trillion question is: how can governments protect the savings of their citizens without creating new problems?

We want to revisit this question because of two events from last week. The big US banks managed to roll back a provision of the Dodd-Frank financial reforms by entangling their policy change in a government funding bill. (Citi lobbyists literally wrote the key passage of the law.) And we got to attend a fascinating discussion on the regulatory value of stress tests. Read more

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

They all come from this Stefan Ingves speech given on Thursday — in which the Basel Committee chair addresses “some concerns… that banks are not calculating risk weighted assets” – the denominator in a bank’s regulatory capital ratio – “consistently”.

Basel is about to release results of a probe into banking and trading books… Read more

Lisa joined FT Alphaville in September 2011 after a tour of duty through the guts of the financial industry, having worked as an analyst at a bank and for a financial data company. She's now the Head of New Projects for FT.com.

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

The Basel Committee on Banking Supervision has finalised rules for bank liquidity. Some of the changes had been anticipated in recent weeks, particularly after the US banks ramped up their lobbying efforts. That said, they’re still quite a big departure from the 2010 draft rules, especially on what qualifies as a high quality liquid asset.

Lisa joined FT Alphaville in September 2011 after a tour of duty through the guts of the financial industry, having worked as an analyst at a bank and for a financial data company. She's now the Head of New Projects for FT.com.

The financial crisis demonstrated how the treatment of securitisations under the Basel framework was some combination of delinquent and a massive enabler of rating agency (and bank) mis-modelling. No wonder then that it only took until July 2009 to get the duct tape out, i.e. release “enhancements” to Basel II, commonly known as “Basel 2.5″.

Now that the committee has had time to truly, madly, and deeply think it over, it’s time for… drumroll… a consultative document on which comment will be sought by March 15, 2013. Oh, it’s on now. Read more

The full story of why JPMorgan entered into the trades that cost it so much money may never become public. However, thanks to Jamie Dimon’s testimony on Wednesday, we can conjecture a little more about the motivations behind the synthetic credit trades entered into by the bank’s Chief Investment Office.

The story begins with surplus deposits. JPMorgan was perceived as safe thanks to its size and relatively good record during the 2008 crisis, so it attracted significant deposit inflows. Much of this money was lent out, but not all of it was, giving rise to the problem of what to invest it in. With government bonds paying record low rates, the bank decided, understandably, to invest some of the funds in corporate and asset-backed securities. The CIO bought over $380bn of these bonds, a very substantial position. Read more

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

There is a lot in it — the Committee has been tinkering with trading books since the crisis exposed serious mismatches between the capital that banks’ models said they needed for trading structured credit, and the losses they ended up experiencing. In fact this review follows up on the 2009 rule-set dubbed ‘Basel 2.5′. Read more

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

Global regulators may expand the definition of a too-big-to-fail financial firm, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks, reports Bloomberg. The “framework should be in place for domestically systemically important banks by the end of the year,” Mark Carney, chairman of the Financial Stability Board, said on Tuesday after a meeting of the group in Basel. Mr Carney also said that the FSB was considering putting in place tougher rules for so-called shadow banks whose failure could harm the global financial system, but this work was less advanced than rules for systemic insurers. The FT reports that Mr Carney also announced that bankers who believe that rivals in other countries are violating new global restrictions on pay and bonuses will be able to complain to the FSB in future. Regulators from the two countries involved will investigate such allegations, and the FSB will track the complaints to see if they are clustered around particular countries, institutions or pay practices, Mr Carney said.

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

Banks will be required to hold emergency stocks of easy-to-sell assets starting in 2015 but will be permitted to dip into these liquidity buffers during times of stress, according to regulators meeting in Basel, says the FT. The top central bankers and regulators from 27 major economies firmly rejected industry pleas for a delay or substantial rewrite of the controversial planned “liquidity coverage ratio” that will require banks to hold buffers against a 30-day market crisis. The governors and supervisors who oversee the Basel Committee on Banking Supervision said they would decide by the end of this year whether to include more assets in the buffer, an alteration the industry has pressed for. The committee made clear that the Basel rules would operate similarly to the UK’s liquidity standards already with regard to banks dipping into their buffers. The Bank of England said in November that banks have been permitted to dip into their buffers when markets freeze as long as they have a credible plan for returning to the required minimum.

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, the WSJ says, citing people familiar with the situation. The Fed’s embrace of the Basel surcharge is expected to come as part of a draft of new rules for US firms that are considered by regulators to be big enough to pose a risk to the financial system. The proposed rules, required by the Dodd-Frank financial law, are expected to detail how much extra capital these firms must hold as a buffer against losses, the cash they must keep around to reduce their need to tap volatile funding markets, and how much money they can pour into any sort of investment. Fed officials are aiming to release the draft proposal this week, but it may slip into January.

Seems the fast diminishing pool of ‘risk-free’ assets is a big enough issue to have the Basel Committee on Banking Supervision completely change its mind on the role of government bonds in its new banking rules. Read more

There are technical and fundamental factors on top of the blind panic and fear. And that’s not all. There are a number of regulatory factors too, and it’s these demons of our own design that FT Alphaville would like to discuss with you. Read more

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

The Vickers report: nice ideas, needs some work — but is there enough legal basis to get the reforms passed? It’s worth asking.

Higher “loss-absorbing” capital is the capstone of the Independent Commission on Banking’s overhaul of UK lenders. More important, arguably, than the ring-fencing concept overall. (Ring-fenced retail banks will be founded upon a 10 per cent capital ratio. The proposal for banks to hold loss-absorbing instruments against 17 to 20 per cent of risk-weighted assets is even bigger. Entire asset classes — CoCos, “bail-in bonds” — could have their fates decided here.) Read more

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

JPMorgan’s chief executive Jamie Dimon has said that the US should consider withdrawing from the Basel III international bank capital standards, says the FT. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” Dimon told the FT. Mr Dimon said there was a threat that Asian banks, in particular, could take US market share because of the combination of US domestic and global rules.

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

New international bank capital rules are “anti-American” and the US should consider pulling out of the Basel group of global regulators, Jamie Dimon, chief executive of JPMorgan Chase, told the FT. Mr Dimon said he was supportive of forcing banks to have more capital but argued that moves to impose an additional charge on the largest global banks went too far, particularly for American banks. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.” Mr Dimon also criticised global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government-backed mortgage-backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Banks could be given relief from Basel III liquidity requirements, following complaints that they would struggle to find liquid assets sufficient for a key coverage ratio, the FT reports. A growing number of members on the Basel Committee now want to soften key technical definitions in the ratio, including reducing the overall amount of liquidity required, and allowing greater leeway for corporate and covered bonds to be included. European banks had faced a particular earnings threat from the liquidity rules, with seven out of 28 lenders failing the rule in a recent JPMorgan analysis, Bloomberg reports.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Both add fresh minimum capital requirements to their respective industries. Similarities generally stop there. The very definition of capital is different, so are risk-weighting and accounting regimes… Read more

Tracy Alloway used to be deputy editor of FT Alphaville. Here she learned the details of derivatives, the absurdities of accounting and the various structures of ... erm ... structured finance. She now covers big US banks for the FT paper, including Goldman Sachs and Morgan Stanley. She pops up on FT Alphaville every once in a while.

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

Central bankers and regulators have agreed to impose an extra capital charge of 1 per cent to 2.5 per cent of risk-adjusted assets on the largest banks in a bid to protect them from the big losses that could trigger another financial meltdown. The FT reports that the deal agreed a smaller increase in capital than central bankers had wanted, in exchange for stricter rules on what can constitute core tier one reserves. About eight banks will have to hold 9.5 per cent of risk-weighted assets as this capital by 2019, while about 20 will have to hold 8 to 9 per cent. The agreement represents a victory for countries like the US and the UK, however Reuters says the deal will disappoint some banks that hoped to use so-called contingent capital or “cocos” to make up the surcharge.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Tracy Alloway used to be deputy editor of FT Alphaville. Here she learned the details of derivatives, the absurdities of accounting and the various structures of ... erm ... structured finance. She now covers big US banks for the FT paper, including Goldman Sachs and Morgan Stanley. She pops up on FT Alphaville every once in a while.

Banks in the European Union could evade part of the tighter Basel III capital requirements under draft legislation implementing the new globally agreed standards across the 27-member bloc, the FT reports. The 500-plus page draft, which has not been officially released, could allow EU banks to count more of the capital in their insurance subsidiaries than the global rules call for. It will also allow some banks to continue issuing hybrid capital – preference shares and other debt-like instruments – for longer than expected. The biggest French financial companies, including Société Générale and BNP Paribas, and the UK’s Lloyds Banking Group have insurance arms. They would benefit disproportionately from the exception.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Last night Bloomberg reported that Lloyds has ruled out a sale of its insurance arm Scottish Widows. A sale had been seen bullish for the bank, by disciplining its vast post-crisis balance sheet a bit more and allowing return on equity to drift into the high teens. (RBS is targeting about 15 per cent ROE from its own balance sheet repair.) Read more

Tracy Alloway used to be deputy editor of FT Alphaville. Here she learned the details of derivatives, the absurdities of accounting and the various structures of ... erm ... structured finance. She now covers big US banks for the FT paper, including Goldman Sachs and Morgan Stanley. She pops up on FT Alphaville every once in a while.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

Banks and regulators are at loggerheads about the volume and quality of liquid reserves they must hold under new rules, the FT reports. Banks in Europe in particular are lobbying against national rules that require even stricter definitions of ‘liquid’ assets than under Basel III, arguing that the costs of hoarding securities will constrain lending growth. Bankers say that if the market for subordinated corporate bonds is to be maintained, they must be made eligible for a key liquidity buffer outlined in the Basel rules. Securitised assets should also be admitted, they add, otherwise the securitisation markets that will be vital to funding markets as central bank liquidity is withdrawn will never take off.

Joseph joined FT Alphaville way back in March 2010. He likes all the politically and legally fiddly bits of finance. He also likes credit, rates, global macro, tail risk, and all that stuff. (You should email him story ideas. He’ll take anything.)

How much bank capital is just enough bank capital to survive a crisis?

Reading this Bank of England paper on the issue, you might think the authors are simply arguing that banks ought to be made to hold more loss-absorbing capital (double, actually) than Basel III will be asking. Read more